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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2015

Play Up Your Strengths

Local expertise and product innovation are critical to succeed in today’s purchase market

Play Up Your Strengths

It’s been more than a decade since the last true purchase market. In the interim, record or near-record low rates artificially propped up the refinance side of the business and inflated the profits of many lenders. The days of low rates and easy-to-find borrowers are gone for the time being, however. Refinance activity was down 60 percent year over year, and the total U.S. mortgage market for 2014 was only about $1 trillion, according to Freddie Mac.

This down cycle will most likely be different than past troughs. Today, nearly half of all homeowners with a mortgage have an interest rate that is lower than 4.5 percent, according to CoreLogic, so many current homeowners won’t be in the market for a refinance anytime soon.

Against this backdrop, it’s safe to assume that many major lenders have taken a long, hard look at their business models and are developing new ways to source purchase deals, control costs and grow business. Meanwhile, smaller mortgage companies and producers are faced with a true test of strength in the face of a smaller, highly regulated and ultra-competitive market.

Smart companies will use the market adjustment as an opportunity to rethink their true strengths. A few years ago, banks with large branch networks, regional footprints and strong investor connections probably would have said scale sets them apart. As the industry unfolded into its current form, they have to look at their business and the industry through a different lens, however.

Although scale is still critically important, so is a deep understanding and connection with your local markets and customers, as well as the products, prices and services you offer to those markets. By truly understanding more about these markets and the needs of individual borrowers, you may find new ways to compete and innovate.

Going beyond data

How does a large company ensure that what it offers through nearly 100 branches and across more than 500 loan officers aligns with what the greater market requires to be competitive? The starting point is to make sure your sales staff has a voice when it comes to process and product decisions. They are the ones on the ground facing their local market day-to-day.

Ask your market leaders to visit the corporate office for face-to-face, in-depth, collaborative sessions with C-level management. Have them interact with key executives to discuss everything from pricing and investor relations to marketing and product development.

These collaborative sessions recognize opportunities for continual enhancements in each market. The feedback can allow the company to quickly design and implement changes, and to allocate resources where enhancements can make a real difference for originators and the borrowers they serve.

This approach will give your company a better appreciation of how client concerns vary from market to market, even within a single state.

Leveraging local knowledge

Local lenders have an advantage over online and national companies operating in their home market because they have the insights to take advantage of local trends. For example, in California and Florida, condominium lending is important, but a significant number of projects fall outside of the eligibility guidelines set by the government-sponsored enterprises (GSEs).

Any number of issues can put credit-worthy condo projects in the penalty box, such as a low-occupancy ratio, too many units owned by a single owner/entity, or too large of a ratio between commercial and residential properties.

In California, liens are often an impediment to condo lending. Meanwhile, in Florida, where condos make up a relatively large percentage of the inventory and new builds are a way of life, occupancy rates are an ongoing issue. These issues don’t necessarily make lending on condo properties an unreasonable risk.

Highly qualified borrowers shouldn’t have difficulty getting loans because certain characteristics in that condo project make it non-GSE eligible. This is where a lender that has researched a development and has knowledge of the local market can find opportunities.

Many of these projects can be sound risks, as are the borrowers looking to purchase units. Combining local knowledge with national insights can help you develop non-warrantable condo financing programs that serve this slice of the market and attract new, less-traditional clients.

Targeting the market

Key Points

How to succeed in a purchase market

  • Give sales staff a voice
  • Cultivate local knowledge
  • Tailor products to individual markets
  • Provide solutions for underserved borrowers

Speed is paramount in the California region, which has different challenges and opportunities depending on the specific market. Northern California’s Silicon Valley market is so competitive that if a borrower can’t acquire financing quickly — sometimes within days — another buyer will swoop in. Lenders that can’t operate at the right pace will lose deals and referral sources.

Contrast this with coastal communities in southern California like Newport Beach where, in addition to speed, having the right array of jumbo products for this high-end market will make or break your business.

The Chicago area offers a variety of city- and state-sponsored programs that provide unique opportunities for first-time home-buyers. Taking advantage of these opportunities requires an understanding of the intricacies of the available programs and the expertise to help borrowers navigate the process. This provides opportunities to generate volume while building loyalty among a local customer base.

The bottom line is that in a purchase market, a traditional set of products and a single standard for service and pricing won’t work for a lender that is spread across a wide range of geographic and demographic markets.

Finding new solutions

In addition to market-centric solutions, expanding borrower and property-specific solutions is another way to attack a purchase market. You may find that you can drive additional volume and create differentiation in the marketplace by accommodating complex lending situations and by serving marginalized borrowers who, by any reasonable set of standards, would normally be considered prime borrowers.

The qualified mortgage (QM) provision is disenfranchising highly qualified borrowers who can’t show proof of income or who lack liquid assets. For example, a business may have 20 employees, all of whom can qualify for a mortgage because they have paystubs that show a steady income stream. The owners, however, can’t qualify because they own the business and — under the new regulations — have difficulty documenting their income.

Before the housing bubble, these borrowers were served by low-doc or no-doc loans. These products were so badly abused pre-2008 that they are now placed far outside of QM safe harbor and have gone out of favor within the industry. In many cases, however, legitimate reasons existed for creating these products and the need they initially filled still exists.

These same rules make it hard for retirees to qualify if their only income is social security, even when they have substantial savings and investments. The income generated from their investments may easily cover expenses, including servicing a mortgage, but may not meet the income parameters for a conforming loan.

In this past second quarter, 38 percent of all home sales went to cash buyers, which raises a question: How many of these homes could have been purchased by mortgage-loan customers if lenders had made the right types of products available? In areas that have high concentrations of retirees, like Arizona and Florida, the opportunities to reach prospective borrowers is impeded by a lack of the right product mix.

Even with all the opportunities available, it’s understandable that lenders have been reticent to pursue loans outside of the QM box. As the industry moves forward, however, it must accommodate borrowers who have the ability to repay a loan but don’t fit neatly into the QM template. With disciplined underwriting protocols and products, a lender can fill the market gaps where there are ways to generate purchase volume while serving unique borrower segments.

•  •  •

Former Speaker of the House Tip O’Neill once said “all politics is local.” The same can be said about the mortgage business — now more than ever. Understanding the market, the borrowers, the properties and consumers who are currently underserved is vital to succeeding in today’s mortgage lending climate.

With the contraction present in this purchase market, you must identify new customers, answer needs that are specific to the markets you serve, and re-educate sales teams on how to best serve and meet their borrowers’ immediate needs. Only then will you pass the test of strength and lift your business to new heights in today’s purchase market. 


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